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outsidelegalguy

Limitation on Subcontractor's Subcontracting

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I know that if a prime contract is set aside for small business, there is a limit on how much the small business can subcontract. See FAR 52.219-14. Is there a similar limitation on how much a small business that has been selected for a subcontract on the basis that it is a small business can subcontract?

If, for example, a large prime contractor awards a subcontract to a small business and uses that award towards satisfying its small business subcontracting plan requirements, is there any limit on how much that small business can further subcontract, potentially to a large business? Can it subcontract essentially the entire job, retaining only a negligible contract management role?

I haven't been able to find anything that expressly prohibits such a practice.

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The clause restricts the percentage of the contract that maybe subcontracted, dependent on the requirements. The prime must perform that percentage of the contract stated in the clause.

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outside:

I know of no restrictions on subcontracting by first-tier subcontractors or below. The restriction is on the prime, and the 52.219-14 clause is not a mandatory flowdown.

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Thanks, Vern. I'm not aware of any limit either, nor could I find one, even if one of the bases for the subcontract award is that the subcontract is to a small business. And, I've certainly heard of small businesses being awarded a subcontract based in part on their status, then turning around and subbing out virtually all of the work.

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Guest carl r culham

outside: I advise some caution with regard to your second question. The answer may actually be in the subcontracting plan itself. As provided by FAR 19.704(a)(9) and any further agency supplement to it the subcontracting plan could contain some assurances that may act as limitations of sorts.

FAR 19.704(a)

(9) Assurances that the offeror will include the clause at 52.219-8, Utilization of Small Business Concerns (see 19.708(a)), in all subcontracts that offer further subcon- tracting opportunities, and that the offeror will require all subcontractors (except small business concerns) that receive subcontracts in excess of $550,000 ($1,000,000 for construction) to adopt a plan that complies with the requirements of the clause at 52.219-9, Small Business Subcontracting Plan (see 19.708(:D);

(10) Assurances that the offeror will?

(i) Cooperate in any studies or surveys as may be required;

(ii) Submit periodic reports so that the Government can determine the extent of compliance by the offeror with the subcontracting plan;

(iii) Submit the Individual Subcontract Report (ISR), and the Summary Subcontract Report (SSR) using the Electronic Subcontracting Reporting System (eSRS) (http://www.esrs.gov), following the instructions in the eSRS;

(iv) Ensure that its subcontractors with subcontracting plans agree to submit the ISR and/or the SSR using the eSRS;

(v) Provide its prime contract number and its DUNS number and the e-mail address of the Government or Contractor official responsible for acknowledging or rejecting the reports, to all first-tier subcontractors with subcontracting plans so they can enter this information into the eSRS when submitting their reports; and

(vi) Require that each subcontractor with a subcontracting plan provide the prime contract number and its own DUNS number, and the e-mail address of the Government or Contractor official responsible for acknowledging or rejecting the reports, to its subcontractors with subcontracting plans.

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outside: I advise some caution with regard to your second question. The answer may actually be in the subcontracting plan itself. As provided by FAR 19.704(a)(9) and any further agency supplement to it the subcontracting plan could contain some assurances that may act as limitations of sorts.

FAR 19.704(a)

(9) Assurances that the offeror will include the clause at 52.219-8, Utilization of Small Business Concerns (see 19.708(a)), in all subcontracts that offer further subcon- tracting opportunities, and that the offeror will require all subcontractors (except small business concerns) that receive subcontracts in excess of $550,000 ($1,000,000 for construction) to adopt a plan that complies with the requirements of the clause at 52.219-9, Small Business Subcontracting Plan (see 19.708(B));

(10) Assurances that the offeror will?

(i) Cooperate in any studies or surveys as may be required;

(ii) Submit periodic reports so that the Government can determine the extent of compliance by the offeror with the subcontracting plan;

(iii) Submit the Individual Subcontract Report (ISR), and the Summary Subcontract Report (SSR) using the Electronic Subcontracting Reporting System (eSRS) (http://www.esrs.gov), following the instructions in the eSRS;

(iv) Ensure that its subcontractors with subcontracting plans agree to submit the ISR and/or the SSR using the eSRS;

(v) Provide its prime contract number and its DUNS number and the e-mail address of the Government or Contractor official responsible for acknowledging or rejecting the reports, to all first-tier subcontractors with subcontracting plans so they can enter this information into the eSRS when submitting their reports; and

(vi) Require that each subcontractor with a subcontracting plan provide the prime contract number and its own DUNS number, and the e-mail address of the Government or Contractor official responsible for acknowledging or rejecting the reports, to its subcontractors with subcontracting plans.

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In any case, I don't see how the government can enforce a subcontractor's subcontracting plan. Neither FAR 52.219-9 nor 52.219-16 (Liquidated Damages--Subcontracting Plan) are mandatory flowdown clauses. Unless the government can successfully argue that it is a third-party beneficiary of a subcontractor's plan, I don't see what remedy it would have. I suppose that it could try to take action against the prime for allowing the subcontractor to deviate from its plan without reason, but I don't know if that would succeed.

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I can see a problem if a prime has an approved sub-k plan, and subs to a small business that is just a front end for a large business that does the work. If the prime knows this, that may violate its obligation to make a good faith effort to meet the elements of its plan.

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I can see a problem if a prime has an approved sub-k plan, and subs to a small business that is just a front end for a large business that does the work. If the prime knows this, that may violate its obligation to make a good faith effort to meet the elements of its plan.

Why? 19.704 doesn't require the prime to make its subs actually conduct the work. It just says "subcontract."

Maybe the goal of 19. 7 is for small businesses to get subcontracts and the associated revenue, not actually do the work? A limitation on subcontracting clause could be included in 19.7 but it's not. The direct subcontract program and 8(a) programs, which both have limitations on subcontracting, arguably have goals to increase employment by or competency of new small businesses or minority businesses, which would require the small business to do the work.

Maybe the goal of the subK program is just to increase the number of small businesses. Legitimate small businesses, because, as for being a "front," I think the affiliation rule would apply to the small business subcontractor. Thus, if the small business really was controlled by the large business subcontractor (or another large business) under those rules, the small business subcontract could be liable for mispresenting its small business status, although the large business ("acting in good faith") could still rely on the subcontractor's small business representation.

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Please note that I said the prime knows that it is subcontracting to a small business that is merely a front end for a large. That might be seen as a lack of good faith. Just speculating, but I think I would want a better defense if I were faced with liquidated damages. Then again, maybe the goals of the SB system are satisfied if the small business can record the revenue, even if it goes in one end and immediately out the other.

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I don't see how this scenario conflicts with FAR 52-219-16 (a) "?Failure to make a good faith effort to comply with the subcontracting plan,? as used in this clause, means a willful or intentional failure to perform in accordance with the requirements of the subcontracting plan approved under the clause in this contract entitled ?Small Business Subcontracting Plan,? or willful or intentional action to frustrate the plan.""

If a prime submits a contracting plan saying they plan to subcontract $X to small business and the plan includes the arrangement we are talking about (a small sub does a pass-through to a large firm), the prime is adhering to their plan. Even if this wasn't originally contemplated, the small business subcontract is fostering the plan. Remember, we agreed that there is no prohibition to this arrangement - there's nothing saying this is improper.

Assuming the small business has some involvement managing the effort, doesn't the small business still benefit? They established a new business relationship with another firm, they get some management experience, they also gain some experience from the past performance perspective, and they show revenue.

I'm not advocating this as a practice, by the way. All I'm saying is I don't see how the prime can be accused of not making good faith efforts.

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How about from the perspective of the large business that's subcontracting from the company that was awarded the work because it was a small business? Is there any impropriety in the large business taking that lower-tier subcontract if it knows that the prime awarded it to the small business and intends to use the award to help achieve its SB subcontracting goals?

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Legally there's no problem. Appearance-wise, it's questionable. The bottom line is a large business takes credit for a small business subcontract that perhaps should be a direct subcontract with the large. The other potential complaint is higher overall contract costs because of the pass-through.

If I were involved, I would make sure the small business did other than token work. Otherwise, I would say the prime should justify a subcontract directly to the large. That would support the "good faith" subcontracting efforts.

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I don't see how this scenario conflicts with FAR 52-219-16 (a) "?Failure to make a good faith effort to comply with the subcontracting plan,? as used in this clause, means a willful or intentional failure to perform in accordance with the requirements of the subcontracting plan approved under the clause in this contract entitled ?Small Business Subcontracting Plan,? or willful or intentional action to frustrate the plan.""

If a prime submits a contracting plan saying they plan to subcontract $X to small business and the plan includes the arrangement we are talking about (a small sub does a pass-through to a large firm), the prime is adhering to their plan. Even if this wasn't originally contemplated, the small business subcontract is fostering the plan. Remember, we agreed that there is no prohibition to this arrangement - there's nothing saying this is improper.

Assuming the small business has some involvement managing the effort, doesn't the small business still benefit? They established a new business relationship with another firm, they get some management experience, they also gain some experience from the past performance perspective, and they show revenue.

I'm not advocating this as a practice, by the way. All I'm saying is I don't see how the prime can be accused of not making good faith efforts.

I think Ron is saying that, if the small business is "merely a front" for a large business, the small business is not really small. If the subcontracting large business knows that, the subcontracting large business may not "rely in good faith" on the small business's representation that it is small. Right Ron?

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Not trying to stir up anything. Just saying that knowingly subbing to a small business that will just turn around and sub the work out to a large business, might have trouble meeting a "good faith" test. I would prefer not having to justify it to a CO. If it technically complies with the subcontracting plan and good faith requires nothing more than that, then fine.

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The prime only has to make a good faith effort to comply with its plan. It does not have to make a good faith effort to contract with subs that will do the work themselves. Nor must it plan to subcontract only with subs that will do the work themselves.

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Legally there's no problem. Appearance-wise, it's questionable. The bottom line is a large business takes credit for a small business subcontract that perhaps should be a direct subcontract with the large. The other potential complaint is higher overall contract costs because of the pass-through.

If I were involved, I would make sure the small business did other than token work. Otherwise, I would say the prime should justify a subcontract directly to the large. That would support the "good faith" subcontracting efforts.

formerfed,

I agree, but we should acknowledge that COs generally do not put much thought into negotiating subcontracting goals for specific contracts. They will insist on predetermined goals assigned to their agency instead of considering what they are buying, the contractor's past subcontracting accomplishments, the industrial base, etc. This can lead to unrealistic subcontracting goals.

A few years ago, the Navy issued an edict that 40% of ship repair contracts were to be subcontracted to small business. If you maximized the capacity of all of the small business concerns that supported ship repair in San Diego, you wouldn't come close to 40%. The local shipyards complained, I advised the PCO that the goal wasn't realistic (I was the Deputy for Small Business), but the PCO didn't care--40% was the magic number. Not only that, the consequences for not meeting the 40% requirement were stiff when it came time to determining award fee. It wasn't long after awarding contracts with these goals that we started seeing new small business subcontractors whose sole purpose was to manage other subcontractors.

Just wanted to point out that the Government can have a role in such contractor behavior.

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What about the ostensible subcontractor argument?

I have read this provision a number of times with this concept in mind. However, usually, I have been dissuaded by the language in 121.103(h)(4) which seems to limit the rule to the relationship between a subcontractor and a prime contractor. However, if there ever was a basis for the Government to go after contractors engaged in this arrangement, I think this would be it. This would especially be true if they just took out all reference to prime in that provision. The end result is that the two companies would be deemed in a JV and thus affiliated for that job causing the small business to likely lose its small business status.

"(h)(4) A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes. An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or of an order under a multiple award schedule contract, or a subcontractor upon which the prime contractor is unusually reliant. All aspects of the relationship between the prime and subcontractor are considered, including, but not limited to, the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation."

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Uuuh, the last post in this thread was made nine months ago. You start off as though it was yesterday.

Because it is an important issue that warrants continued evaluation . . . ? I was doing research on that point yesterday, and so it came up for me again.

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You're citing SBA regulations used when it decides protests against a prime contractor's size status. I don't know of any basis for SBA to decide a subcontractor's size status, although I haven't researched the point.

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